1. Chicago Board of Trade Market News

Outlook: USDA’s August WASDE and Crop Production reports were published on Tuesday, and the estimated average U.S. corn yield was increased by 2.1 bushels above the prior trend estimate to a record of 167.4 bushels per acre. Such a large yield is expected to produce just over 14 billion bushels of corn. The combination of that production and the beginning stocks will produce a new record corn supply for the approaching 2014/15 season. However, the estimate for U.S. corn ending-stocks in 2014/15 of 1.808 billion bushels was virtually unchanged from the prior July estimate of 1.801 billion bushels. Bearish traders with short position were disappointed because they needed an estimate of U.S. corn ending stocks well in excess of 2 billion bushels to justify driving prices lower. Because of this, the outlook is that there can presently be a limited bounce in corn futures contracts as positions are adjusted. Future corn yield estimates for the 2014/15 season will need to increase further before there is sufficient justification to drive prices lower. A summary of the feed grain data in Tuesday’s August WASDE follows:

The first survey-based estimate from USDA is for a national average corn yield of 167.4 bushels per acre. The sorghum yield forecast was increased 3.0 bushels per acre for a national average yield of 67.1 bushels and production of 429 million bushels. Yet, the 2014/15 ending stocks for U.S. sorghum declined by 10 million bushels due to increased demand. The report also contained a 2 bushel per acre yield increase for barley to 73.2 bushels per acre, but barley ending stocks only increase 1 million bushels from the prior estimate, to 81 million bushels for 2014/15.

The record corn supply of 15,243 million bushels for the 2014/15 season is not expected to be so cumbersome; The production is partly offset by a 65-million-bushel reduction in beginning stock for the 2013/14 season as corn use for ethanol and exports were increased 45 million bushels and 20 million bushels and in the 2014/15 season, ethanol and exports were each raised 25 million bushels, and feed and residual was increased 50 million bushels. The end result is that the low of USDA’s projected season-average farm price for U.S. corn was lowered 10 cents to $3.55 per bushel, which is about present price levels

2. CBOT Corn Futures

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast: August 15-18 is expected to bring a swath of moderate-to-locally heavy rain (0.5 to 2.5 inches) from the northernmost reaches of the Cascades, Intermountain West and Rockies southeastward through most of the Dakotas, the upper Mississippi Valley, the southern Great Lakes Region and the Ohio Valley. Light rainfall is expected for most other regions of dryness and drought, with scattered moderate rains dampening the Rockies. Little, if any, precipitation is expected in much of Georgia and South Carolina, central and southern Texas, the Great Basin, and the Far West south of the Cascades.

The ensuing period of August 19-23 favor above-median rainfall from the northern Rockies eastward through the northern Plains, the middle and upper Mississippi Valley, the Great Lakes, the Ohio Valley, the upper South and the Northeast outside of New England. Below-median precipitation is anticipated for Oregon, Nevada, Utah, the Four Corners States, Texas and adjacent parts of neighboring states. Elsewhere, neither unusually dry nor wet weather is favored. Follow this link to view current U.S. and international weather patterns and the future outlook: Weather and Crop Bulletin

5. FOB

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: Merchandisers were in agreement that DDGS prices showed some recovery this past week. Demand has still not returned to full strength but fourth quarter prices seem to be consistently holding a $5-10/MT premium over SEP prices. That fact seems evident in the reported rates and estimates in the pricing table. In relation to September prices, there were some containerized sales to Vietnamese buyers at $227/MT, for September shipment. Vietnamese buyers have become increasingly skilled at correctly interpreting market conditions in the past few years.

Buyers from other Asian destinations, such as Thailand and the Philippines, are also making pricing inquires – but in many instances there continues to be about a $10/MT difference between the bid and asking price. As buyers and merchandisers negotiate with each other on that spread, a general rate increase (GRI) seems to be to be developing in logistical channels for the late November or early December time period. Current market discussion is that freight rates could go up as much as $200 for 40-foot containers.

A number of ethanol facilities are presently operating at full capacity and the affiliated DDGS merchandisers have a lot of product to move, and they sound ready to negotiate with any buyer who is willing to acquire substantial volume. The largest increases in demand have come this past week from the domestic feed mills and feed lot operations. Those domestic buyers often focus heavily upon basis and the price of differential of DDGS in relation to cash corn, and their increased interest seems to indicate that they perceive an opportunity.

Ethanol Comments: USDA increased corn used for ethanol production in the expiring 2013/14 season by 45 million bushels and by 25 million bushels in the approaching 2014/15 season that begins September 1. The increases stem in large part from the strong export demand for corn based ethanol. That demand is indicated in the fact that ethanol production increased from an average daily rate of 902,000 barrels per day (bpd) to 931,000 bpd while U.S. ethanol stocks dropped from 18.3 to 17.8 million barrels in the same period. Market dynamics seem able to facilitate present ethanol production levels if there is no substantial decline in global gasoline prices and/or increase in corn prices.

USDA seems to have accounted for the likelihood of strong corn demand coming from the ethanol industry as much of the increase in global coarse grain consumption in 2014/15 is due to U.S. domestic consumption. The estimate for E.U. corn consumption was actually lowered by 2 MMT because heavy rains have reduced wheat quality and increased the prospects for more of their own wheat feeding.

Delayed consumption from the E.U. and China should allow ethanol facilities sufficient time to price out their corn needs well into the 2014/15 season. However, those two buyers will not remain out of the market forever. As well, USDA is forecasting that other global buyers, such as Egypt, Saudi Arabia, South Africa, Algeria and Taiwan will increase their purchases.

The differential between the cost of corn and the co-products at ethanol facilities implies that spot margins rebounded this past week across the Corn-Belt. The differentials are the following for week-ending Friday, August 15, 2014:

Illinois differential is $3.55 per bushel in comparison to $3.16 the prior week and $2.40 a year ago.

Iowa differential is $3.47 per bushel in comparison to $3.17 the prior week and $2.37 a year ago.

Nebraska differential is $3.50 per bushel in comparison to $3.02 the prior week and $2.02 a year ago.

South Dakota differential is $3.81 per bushel in comparison to $3.31 the prior week and $2.47 a year ago.

7. Country News

China: The drought in Central China is expected to have a limited impact on national corn output due to higher overall planted acreage offsetting the crop damage, according to Reuters. High domestic supplies following four straight years of record harvests will likely preclude China from going abroad to purchase grain. China has already cut corn imports by 10 percent this year. While the drought is having little effect on corn output, it is expected to put a dent in China’s barley crop.

Kazakhstan: Central Asia’s largest grain producer is set to lower exports this year in anticipation of a smaller harvest, reports Reuters. Poor weather in the country’s main northern growing regions are the primary culprit for the reduction. So far this year the country’s Food Contract Corporation has exported 453,000 MT of grain, 430,000 MT of which has gone to Iran. Kazakhstan exported 8.7 MMT of the 18.2 MMT of grain that farmers harvested in 2013/14.

Russia: The cost of borrowing has risen significantly for Russian farmers and is driving a rush in grain exports to cover bank loans, according to Reuters. Russian farmers rely heavily on loans to finance themselves, however the rush to sell may cause more harm than good given that it could drive global grain prices down even further from their current four-year lows. The government rushed to the aid of farmers during the financial crisis of 2008 and 2010’s drought, however Western sanctions are taking their toll on the Russian economy and will likely limit Moscow’s ability to provide assistance. Further, Sberbank and the Russian Agricultural Bank, two of the country’s largest farm creditors, have been sanctioned by the EU, which prevents them from accessing its capital markets. The Russian Agricultural Bank has also been sanctioned by the U.S.

Russia’s Central Bank has reported that debt in the agriculture and hunting sectors had as of July 1 grown to 1.27 trillion rubles, up from the 1.24 trillion rubles reported in January. Interest rates on agricultural loans are also up an additional 3-4 percent from the 12-14 percent rates seen in January.

South Africa: Corn prices in the continent’s largest producer have fallen for the second week in a row on the expectation of the largest harvest in 33 years, reports Bloomberg News. Yellow corn prices dropped 3 percent to total $176/MT. South Africa is expected to produce 14.1 MMT of corn this year.

Ukraine: Ukraine’s agricultural minister, Ihor Shvaika, has announced that the 2014 grain harvest could exceed 63 MMT, according to Reuters. Analysts had previously forecast that Ukraine would bring in 59-61 MMT of grain, and UkrAgroConsult raised its forecast this week to 58.5 MMT.

8. Ocean Freight Markets and Spread

9. Ocean Freight Comments

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting:It was quite a rally in the Baltic Indices this week; at least in terms of the percentage movement.

However, when a market is down this low it does not take much to produce a double digit percentage change.

Is this the turnaround in ocean freight values that vessel owners were hoping for? Maybe not, but it will provide some relief against the prevailing poor vessel economics and it may confirm that we have put in the lows for the year. The physical market is not up as much as the Baltic Indices but things are a bit better and the Pacific Panamax segments seem to be getting a good bounce. We will have to see if this can hold until we get into the North American fall harvest season.

Below is a recent history of freight values for Capesize vessels of iron ore from Western Australia to China: